Many of the devices company shareholders approve to discourage takeover attempts -- ostensibly to protect their own interests -- actually cause the prices of the company's stock to decline, according to a staff study released yesterday by the Securities and Exchange.
But the staff said some of these devices, called shark repellents, have a less harmful effect on stock prices than others and that shareholders seem to be learning that.
The repellents that have a more adverse effect on stock prices tend to be approved by companies in which management owns large portions of the outstanding stock rather than in companies in which big institutional investors, like pension funds, are major shareholders.
Insiders can more "rationally" support shark repellents that decrease the value of their holdings because they have another concern -- such devices discourage a hostile takeover that might cost them their jobs.
Antitakeover devices generally create conditions that make it harder to change management of a company in the case of a takeover. Such devices are designed to discourage takeover attempts.
So-called fair price amendments generally require that all shareholders in a company be offered the same price for their stock. The study said fair price provisions have the least harmful impact on stock prices.
Other provisions that are more detrimental to stock prices include so-called supermajority amendments that may increase to as much as 90 percent the level of voting shares required to approve a change in management. The supermajority provision is more likely to be adopted in a company in which insiders control a large block of stock, the SEC staff said.
Another repellent staggers the election of directors over several years so that a person or company that gains control of a majority of the stock cannot replace the board of directors. The so-called poison pill repellent permits a company to issue new securities in the case of a hostile takeover, a move that makes it more expensive to acquire the company.